FUNDRAISING: A LOOK AT THE NEW CRA POLICY

Not for Profit & Charity Forum

November 16, 2012

Harrison Hot Springs Resort & Spa, Harrison Hot Springs, BC

T. Charles De Jager and Luke JohnsonDe Jager Volkenant & Company

Barristers & Solicitors#5 – 15243 – 91 AvenueSurrey, B.C., V3R 8P8

(604) 953-1502cdejager@dvclawyers.comljohnson@dvclawyers.com

www.dvclawyers.com

NEW CRA FUNDRAISING POLICY

• CRA released previous policy in 2009, CSP-028. Criticized for being too difficult to read and apply

• CRA issued new policy in April of 2012, CG-013, Fundraising by Registered Charities. Policy seeks to provide charities with a comprehensive guide for fundraising activities. Policy is improvement over earlier version but still somewhat complex

• Charities should read the whole policy including the Appendix

CRA FUNDRAISING POLICY

• CRA policy is that fundraising is not charitable. Fundraising is not a charitable purpose in itself or a charitable activity that directly furthers a charitable purpose

• CRA accepts fundraising as a necessary means to pursue a charitable purpose rather than an end in itself

• CRA will apply the policy strictly

FUNDRAISING

• Fundraising is “any activity that includes a solicitation of present or future donations of cash or gifts in kind, whether the solicitation is explicit or implied”

• Broad definition with flexibility for CRA to cast activities as implied fundraising

SCOPE OF ACTIVITIES• Fundraising can be a single action (e.g. ad) or a series of actions (e.g.

capital campaign) carried out by the charity (staff, volunteers) or by anyone acting on its behalf (contract fundraisers, agents) and includes: – face to face canvassing, telemarketing, major gift work with

individuals, direct mail– internet or media campaigns (for example, electronic mail, online

publications, Web sites, television or radio) – printed information, advertisements or publications (for example,

newspapers, flyers, brochures, and magazines)– events (sports tournaments, runs, walks, auctions, dinners, galas,

concerts, and travel or trekking adventures)– sales of goods or services– donor stewardship, and membership or corporate sponsorship

programs– researching and developing fundraising strategies and plans or

prospective donors– recruiting development officers, hiring fundraisers– operating donor recognition programs

EXCLUDED ACTIVITIES

• Fundraising does not include: – seeking grants, gifts, contributions, or other

funding from other charities or governments– recruiting volunteers to carry out general

operations of the charity – related business activities

• Exclude these items from T3010 allocation

PROHIBITIONS

• Fundraising must not: – Become a purpose of the charity. Charity must ensure

that fundraising is secondary to its charitable purposes

– Result in more than incidental private benefit. A private benefit will usually be incidental where it is “necessary”, “reasonable” and “proportionate to the public benefit achieved” (see definitions in policy). Charity must assess how fundraising might benefit members, directors and insiders

PROHIBITIONS, cont.

– Be illegal (e.g. fraud, improper donation receipts, notably tax shelters, violation of statutes governing charitable activity, breach of consumer protection legislation)

– Be contrary to Canadian public policy (e.g. breach of laws, violation of CRTC requirements, fundraising that results in harm to the public interest by excessive fees or misrepresentation)

PROHIBITIONS, cont.

– Be deceptive (e.g. misleading donors). Charity must ensure representations are truthful, accurate, complete and timely

– Be an unrelated business (fundraising activity that overshadows or is not connected to charitable activities)

• Engaging in prohibited fundraising may be grounds for revocation, sanctions or other compliance actions

CRA ASSESSMENT • Factors CRA considers to determine if charity is engaged in

prohibited fundraising:– Disallow fundraising where the resources devoted to fundraising exceed

the resources devoted to charitable activities (significant factor)– Discourage fundraising without an identifiable use or need for the

proceeds– Disallow inappropriate purchasing or staffing practices:

• purchases of fundraising merchandise or services for unnecessaryfundraising or that do not increase fundraising revenue

• paying more than fair market value for fundraising merchandise or services

• sole source or not-at-arm's length contracts for fundraising merchandise or services without justification or independent verification that contract is for fair market value

– Discourage activities where most of the gross revenues go to contracted non-charitable parties

CRA ASSESSMENT, cont. – Discourage commission-based fundraiser remuneration or

payment of fundraisers based on the amount or number of donations

– Disallow misrepresentations in fundraising solicitations or in disclosure about fundraising costs, revenues or practices

– Discourage fundraising initiatives or arrangements that are not well documented

– Discourage high fundraising expense ratio• Factors that may influence CRA assessment:

– Consider the size of the charity (small charity with limited cash constituents)

– Consider causes with limited appeal– Accept donor development programs (future returns)– Consider involvement in gaming activities (ratios of 70% or

higher are considered acceptable by province)

FUNDRAISING RATIO

• Ratio of fundraising costs to fundraising revenue calculated on an annual basis

• Fundraising costs (T3010 line 5020) ÷Fundraising revenue [T3010 line 4500 (receipted donations) + line 4630 (amounts generated as a direct result of fundraising costs but not receipted)] = ratio

FUNDRAISING RATIO, cont.• Costs / revenue under 35%: unlikely to generate

concerns by the CRA • Costs / revenue of 35% to 70%: CRA will examine the

average ratio over recent years to determine if there is a trend of high fundraising costs. The higher the ratio, the more likely CRA will be concerned the charity is engaged in fundraising that is not acceptable, requiring a more detailed assessment of expenditures

• Costs / revenue above 70%: raises concerns with the CRA. The charity must be able to provide an explanation and rationale for this level of expenditure to show that it is not engaged in unacceptable fundraising

FUNDRAISING COSTS ALLOCATION

• Fundraising costs are all costs related to any fundraising activity. Charities must report these costs on their T3010

• Where fundraising activities include content not related to fundraising, some costs may be allocated to charitable, management and administrative or political activities

• Onus on charity to explain and justify allocation• CRA’s guidelines for allocation:

– 100% allocation to fundraising – No allocation of costs of fundraising – Pro-rated allocation of costs

100% Allocation to Fundraising

• Where activities are exclusively (90% or more of the activity was devoted to fundraising) undertaken to fundraise, charity must allocate all costs to fundraising

• To determine if an activity is exclusively undertaken to fundraise, charity must separate the fundraising content from the other content and assess proportions, resources devoted to and prominence given to charitable, fundraising, management or administrative and political content

100% Allocation to Fundraising, cont.

• Activities that will be considered to be 100% fundraising expenditures:– Activities involving participant-selection or audience targeting on

their ability to give– Activities related to gaming (lotteries and bingos)– Dissemination of information and activities that raise awareness

about charity– Infomercials and telemarketing– Branding or charity promotion through cause-related or social

marketing– Activities that involve sports with participants expected to raise

pledges– Golf tournament and gala dinner fundraising

No Allocation to Fundraising

• Where it can be shown that an activity would have been undertaken without a fundraising component, then 100% of the costs may be allocated to the applicable expenditure (e.g. charitable, administrative etc.)

No Allocation to Fundraising, cont.

• To demonstrate this, charity must satisfy the “substantially all” test:– Substantially all (90% or more) of the activity

advances objectives other than fundraising– When completing this test, a charity must

separate fundraising content from other content

Pro-rated Allocation of Costs

• In some cases a charity may be able to pro-rate the allocation of costs of an activity between fundraising expenditures and charitable, management or administrative and political activity expenditures

• Charity must be able to establish that less than 90% of the total content of the activity advances fundraising

Pro-rated Allocation of Costs, cont.

• If more than 90%, then all expenditures must be allocated to fundraising

• To determine if pro-rating is possible, charity must separate the fundraising content from other content

• Onus is on the charity to produce the necessary accounting records to support the allocation

What is Charitable Content

• Charitable content of an activity generally:– Will directly further the charity’s charitable

purposes– Focuses primarily on beneficiaries or potential

beneficiaries of the charity’s programs, services, or facilities, not current or prospective donors

– Is not, as a rule, prepared and/or delivered by individuals or organizations whose skills and usual responsibilities are to fundraise

What is Fundraising Content• Fundraising content of an activity may include:

– Implied or explicit requests for donations or cash or gifts in kind

– Information about how to make a donation, including planned giving

– The provision of goods and services that do not directly further the charity’s charitable purpose

– Activities, such as sports events, where participants are encouraged or expected to raise pledges

– Advertising to promote events that involve fundraising– The management and administration of fundraising

activities (e.g. planning and research for future fundraising)

What is Management/Administrative Content

• Management and administrative content will tend to relate to:– Arranging, holding and reporting on board

meetings– Bookkeeping, accounting, auditing, personnel

and other administrative services– Purchasing supplies and equipment and

occupancy costs for administrative offices– Applying for grants or other types of government

funding and/or for gifts from other qualified donees

What is Political Content

• Political content–An activity that directly or indirectly

attempts to retain, change, or oppose a law in Canada or abroad, or sway public opinion on social issues

CRA RECOMMENDATIONS• CRA recommendations to comply with policy:

– Use a prudent planning process– Evaluate fundraising performance in the context of CRA

guidance, before and after– Adopt appropriate procurement and staffing processes, scaled to

the amount raised– Be aware of risks associated with hiring third-party fundraisers– Provide ongoing management and supervision of fundraising– Keep complete and detailed records relating to fundraising

activities– Provide disclosure about fundraising costs, revenues, practices,

and arrangements

SPLIT RECEIPTING RULES• Traditional rule: any “advantage” accruing to a donor

rendered the entire gift invalid, resulting in no receipt • Rule has been changed by proposed amendments to the

ITA to allow for some “advantage” and the issuance of a receipt for a partial gift. CRA has treated the proposed amendments as effective. CRA has recently enacted legislation to make the changes law

• A charity may issue a receipt for the “eligible amount” of a gift. The “eligible amount” is the amount by which the fmv of the donated property exceeds the amount of the “advantage”, if any, received by the donor

SPLIT RECEIPTING RULES, cont.

• An “advantage” is: – property, service, compensation, use or other benefit– in any way related to a gift– received by or made available to a donor or other

person not at arm’s length with the donor – before, while or after the gift is made

• If the advantage is the lesser of 10% of the fmv of the gift or $75, it can be ignored in the calculation

• If the advantage exceeds 80% of the fmv of the gift, there is generally no eligible amount

FUNDRAISING EVENTS• A common form of fundraising is the sponsorship of an

event such as a dinner, concert or other gathering• Charity must determine the fmv of the admission price by

comparing the usual admission fee charged at similar profit-making events and then issue a receipt for the portion of the ticket price that exceeds the fmv of admission

• All advantages derived from attendance at the event must be deducted from the purchase price of the ticket to arrive at the eligible amount including complimentary items given to attendees

CHARITY GOLF TOURNAMENTS

• The following amounts must be deducted:– Green fees that would ordinarily be charged to a non-

member playing at the course– Cost of a cart rental– Price that would be charged if the meal were

purchased separately at the course– Where complimentary items are given to participants,

the amount that would have to be paid to acquire the merchandise

– Where door and achievement prizes are given, the retail value of all such prizes is to be aggregated and allocated pro rata to all attendees.

DISCUSSION AND QUESTIONS